Retirement

Planning for retirement is more critical today than ever before. Individuals need to be aware that the resources that our parents relied heavily upon for a secure retirement are less and less available today. Consider the following:

• Company pensions and defined benefit plans are being replaced by voluntary 401(k) & defined contribution plans.
• The sustainability of the social security retirement system has recently come into question.
• The average life expectancy has continued to increase for both men and woman because of the advances in medicine.
• As we are living longer we are also spending more on health care.

These general trends are forcing individuals to take retirement into their own hands, as the responsibility for retirement needs has increasingly been put on the individual. This means that for most of us, saving enough for retirement will be one of our primary financial objectives.

Figuring out how much you will need to save for this purpose is sometimes difficult. Many people rely on simple “rules of thumb” for guidance, such as 60-70 percent of pre-retirement expenses, or dividing variable and fixed expenditures into categories to estimate how much they will be in retirement. These approaches are reasonable in the sense that they give general guidance, but they do not provide a high degree of reliability since the results are contingent on the quality of the input. In other words, it is difficult at best to predict with certainty how much your expenses are going to be in retirement, particularly with the more time you have until your desired retirement date.

For these reasons we prefer to focus on the variables that are actually knowable. For example, your current standard of living: since you have worked through your Personal Net Worth and Income & Expense Statements, you know how you currently stand with regard to your Assets, Liabilities, Income, and Expenses. If your current amount of income is enough for you to live comfortably now, this figure can be used as a “base line” to predict how much you will need in the future. If your current income is more or less than you need to be comfortable now, you can adjust this base line accordingly. Once you have a number that you are comfortable with, congratulations! You have just defined your objective, and you are ready for the next step of the analysis.